The Power of a Tax Incentive

During January, 2015, when Utah was deciding whether to levy a tax on e-cigarettes, the owner of Vapor Mania said, “I think we’d be out of business, or at least it would make it much harder to do business.”

As of mid-March 2016, Utah still did not have an e-cigarette tax.

But these municipalities did:

From: taxfoundation.org

Where are we going? To the incentives that taxes create.

The E-Cigarette Tax Debate

First, to clarify (as I needed to do), an e-cigarette provides the feel of smoking through a battery powered device that delivers vaporized (hence, the name vaping) nicotine. Flavored by shops like Vapor Mania, that nicotine syrup could even taste like strawberry short cake ice cream.

When legislators debate e-cigarette taxes, there are so many ideas floating around. They have to think of health and whether e-cigarettes help people stop smoking or act as a teenage gateway drug. They have to consider revenue and whether a high rate will shift some individuals back to tobacco and send others across state lines.

Our Bottom Line: Tax incentives

Taxes create incentives.

Below, we seem to have a correlation between price and the quantity demanded of cigarettes:

From: Jason Furman “Six Lessons from the U.S. Experience with Tobacco Taxes”

Similarly, for pipe tobacco and cigars, when tobacco taxes elevated prices, the quantity demanded went down.

From: “Six Lessons from the U.S. Experience with Tobacco Taxes”

So, when the owner of Vapor Mania predicts the impact of an e-cigarette tax, he is just talking about the power of a tax incentive.

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Elaine Schwartz has spent her career sharing the interesting side of economics. At the Kent Place School in Summit, NJ, she has been honored through an Endowed Chair in Economics and the History Department chairmanship. At the same time, she developed curricula and wrote several books including Understanding Our Economy (originally published by Addison Wesley as Economics Our American Economy) and Econ 101 ½ (Avon Books/Harper Collins). Elaine has also written in the Encyclopedia of New Jersey (Rutgers University Press) and was a featured teacher in the Annenberg/CPB video project “The Economics Classroom.” Beyond the classroom, she has presented Econ 101 ½ talks and led
workshops for the Foundation for Teaching Economics, the National Council on Economic Education and for the Concord Coalition.